Disclosure of CEO pay ratios could stoke healthcare industry tensions

A new rule that will shed light on the rising wealth gap between America's CEOs and average workers could put some healthcare companies with large numbers of low-wage employees in the public's crosshairs.

The Securities and Exchange Commission said last week that it is moving forward with a new compensation disclosure requirement under the 2010 Dodd-Frank financial reform law. Starting in the first fiscal year after Jan. 1, 2017, publicly traded corporations will have to report the ratio of their CEOs' compensation to their median employee pay. The rule, which has some exemptions, will affect about 3,800 companies.

Many pharmaceutical companies and acute-care hospital chains have executives with hefty paychecks.

Dr. Leonard Schleifer, CEO of Regeneron Pharmaceuticals, made $42 million in total compensation last year, the most of any healthcare executive. But those companies also generally have well-paid employees, such as doctors, scientists and nurses.

“Comparing a highly technical healthcare organization with companies in other industries is going to make healthcare companies look like they are treating their employees really well,” said David Bjork, a managing director of consulting firm Integrated Healthcare Strategies.

But that may not be the case for publicly traded healthcare organizations that have many employees in low-paying jobs, such as those who work in post-acute care. Home health workers have been fighting for a $15 an hour minimum wage this year. Seeing a CEO who makes several hundred times what they make could bolster their case.

“Once you take into account those different levels of service outside of the acute-care setting, it could make the (pay) ratio even steeper,” said Steve Sullivan, a principal at executive compensation firm Pearl Meyer & Partners.

The health insurance industry has also been criticized for excessive pay. The CEOs of Aetna, Anthem, Centene Corp., Cigna Corp., Health Net and UnitedHealth Group earned almost $100 million combined last year, an average of about $16.6 million per executive.

Aetna CEO Mark Bertolini raised his company's wage floor to $16 an hour this year to combat internal income inequality. The insurance industry has broadly defended its corporate pay practices.

“CEO compensation is not at all a factor in the rising cost of healthcare that folks are facing,” said Clare Krusing, spokeswoman for America's Health Insurance Plans.

Healthcare CEOs are among the highest-paid in any industry. The top brass of healthcare companies in the S&P 500 earned $13.5 million in cash and stock on average in 2014, the most of eight sectors studied by executive compensation firm Equilar.

Some of the loudest uproar over lavish healthcare executive pay was aimed at John Hammergren, CEO of drug distribution company McKesson Corp. Hammergren made $24.8 million in the most recent fiscal year and more than $102 million in the past three years combined. Shareholders condemned the compensation package in 2014, which led the company to reduce Hammergren's retirement structure.

The National Investor Relations Institute, a lobbying group for publicly traded firms, said companies “may have to prepare for shareholder activism over this disclosure and news reports that will focus on a single 'headline' pay-ratio number.”

Three healthcare companies—pharmaceutical giants Pfizer and Impax Laboratories and health insurer WellCare Health Plans—sit on NIRI's board of directors.

Advocacy groups are banking on shareholder pressure to yield higher wages for employees at the bottom

of the totem pole. “Investors may chose to put their resources into companies with narrower gaps, encouraging those with wide ones to either lift up the bottom wages or rein in CEO pay,” said Sarah Anderson, an analyst at the Institute for Policy Studies.

But compensation experts aren't sure the CEO-to-worker pay ratio will fundamentally change corporate policies. Bjork said current disclosures already show compelling information, but generally haven't changed much. “The information of what someone is actually paid is far more powerful and far more irritating than a (CEO-to-worker) ratio of 400 to 1,” he said.

Healthcare company boards also contend they need to offer large pay packages to lure top talent in a challenging and complicated industry. Investors may ultimately overlook a high pay ratio if they are still getting large returns. “As long as shareholders feel like the organization is performing and the individuals in place are sustaining that, the market will pay what the market will bear,” Sullivan said.